As published in Directorship. Bright and glamourous on the outside, innovation is pretty messy on the inside. In spite of high profile news that makes it seem like most organizations are successful and even disruptive innovators, the reality is that only a fraction of innovation efforts ever reach the market. This article shows how innovation governance increases the rate of successful innovation.

1. September/October 2018 NACDonline.org 43
Closing the Gap Between
Innovation Intent and Reality
Comparing the intent of corporate innovation with
reality shows what can be gained by better governance.
By Guy Pearce
Digital transformation is spurred by the
evolution of software in many industries.
Today, almost any modern electronic
device—your smartphone, home theater
system, even your car’s ignition system—
can be upgraded simply by refreshing or
updating it with new software.
Companies in the financial services sec-
tor in particular are taking advantage of the
latest software innovations to create a vast
array of technologies—colloquially known
as fintechs—to advance and stay on the
cutting edge. Bharat Masrani, CEO of TD
Bank, one of Canada’s top two banks by
assets with operations in the United States,
noted that “thousands of fintechs are vying
for bank customers,” indicating the scale of
the fintech threat to slow-­moving banks.
Even software giants including such
household names as Facebook, Ama-
zon, and Alibaba risk sidelining banks,
according to David McKay, CEO of the
other of Canada’s top two banks by assets,
the Royal Bank of Canada (RBC). In
In Practice response, Financial Times reports that
RBC aims to transform the bank into a
platform offering a diverse ecosystem of
end-to-end services.
The nature of the talent in platform
ecosystems can make competing with
them very difficult, as Microsoft Corp.
found in the early 2000s with Linux, a free
open-source operating system. Instead of
competing with them, Microsoft had by
2013 become one of the biggest contribu-
tors of code to Linux.
Bright and glamorous on the outside,
innovation is pretty messy on the inside.
In spite of high-profile results that make it
seem like most organizations are successful
and even disruptive innovators, the reality
is that only a fraction of innovation efforts
ever reach the market. Effective board
oversight of innovation, however, can be
a deciding factor in a company’s ability to
make innovation actionable.
Innovation Intent
“The financial services industry will see
more change in the next 10 years than
it has in the last 100,” remarked Anand
­Sanwal, CEO of the research firm CB
Insights in 2017. “And that transformation
is being driven by a group of smart insur-
gent start-up companies.” In financial ser-
vices, the threats posed by software tech
giants and the growth of fintech have given
rise to a new generation of corporate inno-
vation hubs.
According to InnovationManagement,
a global online resource center for orga-
nizational innovation, the goals of these
hubs include “digital innovation, rethink-
ing customer experience, improving
operational efficiency, and testing new-
business models.” These goals are associ-
ated with the desire to stay competitive
(see chart, p. 44), but extend to growing
revenue and being better able to meet
customer expectations.
WILLIAMA.RENNJR./ILLUSTRATIONSOURCE

2. 44 NACD Directorship September/October 2018
In Practice Innovation
Innovation Reality
Many innovations fail to meet their often vague objectives, ulti-
mately becoming wasteful expenditures rather than delivering on
corporate expectations. This should concern the board. According
to a 2015 survey by MindMatters, innovation hubs have serious
shortcomings, specifically:
■■ Only 5 percent of workers in innovation programs with U.S.
firms feel highly motivated to innovate.
■■ 77 percent of workers in innovation programs claim that ideas
are poorly reviewed and analyzed.
■■ Less than a third of surveyed firms regularly measure or report
on innovation.
■■ More that 80 percent say that there are resource constraints
involved in bringing innovation to fruition.
The primary reason for these failures of innovation can be attrib-
uted to poor governance.
If an organization’s innovation activities are properly aligned
with its strategy, then issues two, three, and four should be elimi-
nated. That they’re not suggests another governance shortcoming:
strategic alignment. The closer innovation is aligned with the orga-
nization’s objectives and are integrated with the organization by
design, the greater the contribution of innovation to organizational
competitiveness and sustainability.
The emphasis here is on “by design.” If innovations are designed
as stand-alone initiatives that are not aligned with the organiza-
tion’s strategy, it can be nearly impossible to subsequently integrate
successful innovations into them. Sure, stand-alone innovations
can be spun off as start-ups, but this serves neither the sustainabil-
ity nor the competitiveness of the organization.
Effective oversight helps ensure that innovation hubs deliver
on their promise, not only in terms of their outcomes, but also in
terms of their operations. While realizing that there are different
types of innovation and that innovation is inherently messy, good
corporate governance requires answers to questions including what
kinds of problems the innovations hope to solve, and to what extent
the activities are aligned with the capabilities and culture of the
organization.
Appropriately articulating key business problems (why are we
innovating?) is a means of providing the board with the insight
necessary to determine measures of innovation success. Whether
innovation activities are successful or not is driven by dimensions
such as strategic alignment, the problem statement and business
case, organizational capabilities, and the extent to which success-
ful innovation outcomes can be integrated into the organization
and its culture.
Don’t underestimate culture as a potential roadblock to suc-
cessful innovation. For example, innovatively solving a business
problem using blockchain technology will not find traction in an
organization that still operates on faxes, printing calculators, and
old personal computer technology. Culture matters.
Corporate innovation hubs are therefore not a panacea for the
problem of corporate sustainability and competitiveness. So what
should boards do?
Create a supportive culture from the top. As noted, successful
innovation operationalization depends on the organization’s cul-
ture. In a 2015 Forbes article, contributor and venture capitalist
Henry Doss observed, “The most innovative product in the world
has little real value without the cultural ability to absorb, institu-
tionalize and deploy that product.” The tone at the top sets the
climate for innovation with respect to the oft-overlooked matters of
the organization’s appetite and tolerance for change. The less an
organization invites and accepts change, the less the chance of an
innovation program blossoming meaningfully.
Make the business case. In a 2015 Fortune article, “Why Most
Innovations Are Great Big Failures,” author Anne Fisher notes
that many innovations fail because the tough questions aren’t
asked at the outset. “Ideas are treated not as precious pearls to
be polished, but [rather] as sparks born of friction,” she writes,
because “exposing fledgling innovation ideas to the tough love
of tough questions … ensures those ideas can survive in the real
world of real companies placing real bets with real money.” Here,
tough love would be performed by means of tying innovation to
the business case.
Need to stay competitive
Need to increase
revenue
Wish to keep up with
customer expectations
Need for higher margins
Desire to access
untapped markets
57%
34%
41%
48%
54%
Companies are most likely to cite competition
factors as they account for changing R&D priorities.
What is driving the change in your company’s R&D mix?
Source: Strategy+Business

3. September/October 2018 NACDonline.org 45
The tough questions are aimed at understanding the context of
the innovation, as well as understanding the practicalities of oper-
ationalizing it. Poor innovation operationalization is a significant
stumbling block to bringing innovations to market; according to
Harvard Business Review, within three years of a CEO announcing
an innovation program, the venture will have failed due to poor
operationalization.
Oversee structure, process, and content. Innovation manage-
ment also refers to three specific components of good innovation
governance: content, process, and structure. Getting them right is
pivotal to successful innovation.
■■ Content. Qualify the reasons and objectives of the innova-
tion hub, define its area of focus as well as its intensity. Intensity is
important; e.g., if the expectation is for minimum viable products,
then the intensity and consequent funding demands are higher
than if the intensity objective was merely a proof of concept. A
given budget can support fewer high-intensity innovation projects
than it can innovation proofs of concept.
■■ Structure. The innovation hub should be figuratively far
enough removed from the day-to-day business, but not so far away
as to be out of touch with business reality. Determine who is ulti-
mately accountable for innovation as well as the responsibilities of
the innovation team, the level in the organization it reports into,
and the measures of success.
■■ Process. Ensure the existence of a common, repeatable inno-
vation process. Specify the nature, policies, and procedures associ-
ated with partnerships where applicable.
From the Trenches
After 10 instances of pragmatic digital innovation, I learned that
effective change management in driving the corporate adoption of
innovation needs to:
■■ articulate the imperative to change;
■■ incorporate stakeholder input as a means to drive adoption
by “pulling” rather than trying to “push” adoption into the orga-
nization;
■■ start at the beginning of the innovation project, not at the end;
and
■■ demand the personal time commitment from individuals
throughout the organization who are critical in effecting change.
The risk of poor or nonexistent change management can be at the
heart of the failure of even the most viable of corporate innovations.
Striving for Sustainable and Pragmatic Innovation
Innovation governance is a dilemma. Corporate innovation ini-
tiatives—all shiny on the outside—when left ungoverned can
fail catastrophically due to poor governance, closed within three
years or at the next round of corporate cost-cutting. The board
plays a key role in innovation success, reducing the risk of gover-
nance failures by focusing on three primary questions: why, what,
and how? “Why” and “what” focus on purpose, strategic align-
ment, and expected benefit, while “how” focuses on overseeing
operationalization.
Specifically, the board needs to
■■ set the tone at the top, ensuring alignment of the innovation
hub’s objectives with the organization’s strategic objectives;
■■ oversee innovation operationalization and change manage-
ment; and
■■ oversee innovation policy, process, resourcing, and content by
business case.
The gap between innovation intent and reality is also minimized
when corporate innovation is within the context of technological
advances and changes in customer preferences, and is a good fit for
the organization’s culture. The board thus has a major role to play
in ensuring that corporate innovation helps maintain the organiza-
tion’s relevance in its chosen markets.
Innovation governance ultimately increases the rate of success
of corporate innovation in the interests of corporate competitive-
ness and sustainability. In particular, innovation governance miti-
gates the risks of resource waste and hub failure, thereby increasing
the odds of achieving a return on innovation. That’s why there’s
everything to gain and nothing to lose by the better governance of
corporate innovation. D
Guy Pearce has served on boards in banking, financial services,
retail, and a nonprofit over the past decade, and as CEO of a
multinational retail credit business. His corporate digital innova-
tion experience spans 10 enterprises over the past 25 years in
industries as diverse as manufacturing, banking, energy, trans-
port, and insurance.
Good corporate governance requires
answers to questions including what
kinds of problems the innovations
hope to solve, and to what extent the
activities are aligned with the capabilities
and culture of the organization.